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High Court reminder that it pays to take care with performance bonds

The High Court in Simic v New South Wales Land and Housing Corporation [2016] HCA 47 has allowed an appeal against a decision of the NSW Court of Appeal on the construction of two unconditional performance bonds. The appellant was the guarantor of a building company that tendered for a building contract from the respondent housing corporation. The contract required the appellant to provide security in the form of bank guarantees. The performance bonds were executed in favour of “New South Wales Land & Housing Department trading as Housing NSW ABN 45754121940” when in fact the beneficiary should have been ”New South Wales Land and Housing Corporation (ABN 24 960 729 253)”. When the respondent called on the performance bonds, the bank refused to accept the demand based on the security being in favour of a non-existent entity.

The primary question concerned the obligation of the issuing bank to pay the demand of a party who claims to be the beneficiary which, as a result of common mistake, is not the beneficiary named in the performance bond.

However, the High Court held that the bank was justified in refusing to accept the demand under the performance bonds. The bank was at risk of acting in breach of contract if it were to treat the bonds as referring to the respondent when the respondent was not the beneficiary. The bank is usually not involved in the parties’ relationship and as such is entitled to take a “strict” approach in determining whether a demand fulfils the criteria for a demand for payment.

The High Court went on to decide that the wording of performance bonds may be rectified to reflect the true intention of the parties to the performance bond, (i.e. changing the name of the respondent in the performance bonds to “New South Wales Land and Housing Corporation”). Rectification of the performance bonds would entitle the respondent to make a valid demand under the bonds which the bank must in turn honour.

This case highlights the importance of taking care when preparing performance bonds and bank guarantees. It also allows banks to take a “strict” approach to such demands and alleviates the burden on banks to investigate the background of every demand for payment.